If you are a certain age, like me, you may recall a series of clever credit card commercials from Capital One asking “What’s in your wallet?” Here’s one from 2000 featuring a band of plundering Vikings.
Today’squestion is similar – but instead of your wallet my question is “What’s in your IRA?”
This topic was prompted by a recent WSJ Article “The 401(k) Rollover Mistake That Costs Retirement Savers Billions”
Workers miss out on billions in investment gains by pulling retirement savings out of the stock market after switching jobs—often without meaning to.
From the article:
Workers miss out on billions in investment gains by pulling retirement savings out of the stock market after switching jobs—often without meaning to.
When people roll 401(k) balances from their old company’s plan into an IRA (Individual Retirement Account), the money is frequently held as cash until they select new investments. Many never do, according to new research from Vanguard Group. Nearly a third who rolled savings into IRAs at Vanguard in 2015 still had the balance sitting in cash seven years later.
When broken down by age, Vanguard found it was younger investors most likely to stay entirely in cash:
It’s these younger investors who have the most to gain by investing some of their retirement savings in the stock market!
How does this happen?
When you leave a job, one option for your 401(k) account is to roll it into an IRA. If your 401(k) has less than $7,000 the company may roll it into an IRA for you.
Once the rollover to an IRA is complete, you must go back and decide how you want to invest the money. It typically does not get automatically invested.
This can differ from a 401(k) plan, many of which are set up to have automatic enrollment and investing. In automatic 401(k) plans your contribution is automatic and the investment of those contributions is also automatic. Typically these default investments are a Target-Date Fund. If you don’t want to contribute, or if you want a different investment, you must change it yourself.
An IRA does not work that way. There is no default auto investment.* Your money sits in cash, often earning very little, until you go in and select your investment choices.
*Based on the above noted study Vanguard is making the case for an IRA default investment alternative. You can learn more about this policy proposal here.
Similarly, if you set up an IRA (Roth or Traditional) on your own and make contributions to it directly, you must go in and make your investment choice after you’ve made your contribution.
Per Vanguard “Uninvested cash in retirement accounts is a significant problem that hinders millions of Americans saving for retirement.”
So, what’s in your IRA?
